US recession? It's hedge fund heaven

Millions of people are facing foreclosure on their homes, banks are going belly up, tens of thousands are being put out of work, America is on the brink of recession - it's another fantastic year to make money as a hedge fund manager.

The top managers pocketed more personal wealth last year than at probably any time in history. Top of the league table came John Paulson, whose pay packet in 2007 reached $3.7bn (£1.87bn). Close behind him were George Soros and James Simons who made $2.9bn and $2.8bn respectively. The poorest individual listed among the 50 top earning hedge fund managers made $210m.

The list, which is regarded as a definitive guide to hedge fund pay, was compiled by Alpha magazine based on calculations of each manager's share of their firm's performance and fees but excluding the salaries of their employees. The findings astonished even the editors at Alpha. This year's table, the magazine said, "may well prove to be the greatest display of individual wealth creation in any year in the modern history of finance".

The trick that the top fund managers have pulled off is to bet against some of the key trends in the financial markets and win. Paulson exploited the turmoil in the sub-prime mortgage market, making a killing while several banks have been devastated.

Soros who famously made $1bn in a day when he forced the Bank of England out of the European exchange rate mechanism in 1992, came out of retirement to return to the helm of his Quantum fund. He had spotted the potential of exploiting the turmoil in the markets. He succeeded in making returns of more than 30%.

Eight of the top 50 earners are UK-based, including Noam Gottesman and Pierre Lagrange of GLG who made $350m each, and Hugh Sloane and George Robinson of Sloane Robinson Investment Services who made $220m each. The highest-placed UK trader was David Slager of Atticus Capital. He made $450m last year, placing him 13th on the list.

The existence of such fabulous personal remuneration at a time when financial hardship is spreading through the US economy is likely to heighten scrutiny of the largely unregulated hedge funds. This week, the US Treasury secretary, Henry Paulson, talked of the need for hedge funds to be more transparent.

Between them, the top 50 managers in Alpha's list made $29bn last year. The sums involved have increased enormously in a very short time. When Alpha began compiling the table in 2002, Soros was on top with $700m - if he earned that amount today, he would be placed ninth.

Inequality of wealth is more extreme in America today than for decades. According to Jared Bernstein, of the Economic Policy Institute in Washington, the gulf is greater than at any time since 1928, when a similar proportion of US national income - 23% - went to the top 1% of earners.